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Article d'opinion

28 Jan 2020

28/1/20 - William Lazonick, Open Society Fellow

Worried about US inequality? Ban stock buybacks to end the looting of corporations

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This article is part of our Rethinking Corporate Governance blog series

For a nation that claims to value equal opportunity, the United States has become a global leader in economic inequality. Income concentration among the richest households has become ever more extreme, while, for the vast majority, secure and well-paid employment opportunities are increasingly elusive.

At the root of these evils is the corporate addiction to stock buybacks. Yet, for most Americans, stock buybacks are an obscure financial phenomenon, seemingly far removed from their daily lives.

A stock buyback occurs when a business corporation instructs its broker to repurchase its own outstanding shares on the stock market. The purpose of this transaction is to give the company’s stock price a manipulative boost.

And buybacks are massive. From 2009 through 2018, the 465 companies in the S&P 500 Index publicly listed over the decade did $4.3 trillion in buybacks, equal to 52% of their profits. In addition, these companies dispensed $3.3 trillion as dividends, another 39% of profits.

That left only nine percent of profits available to augment the company’s investments in productive capabilities, including the provision of secure employment that, through training and experience, enables employees to become more productive and better paid.

The profits that a company retains are the financial basis for career employment opportunities that can deliver a middle class standard of living. For an economy to benefit masses of workers, its major companies must retain profits and reinvest in the productive capabilities of the labour force.

Rather than “retain-and-reinvest“ however, a company that does buybacks tends to “downsize-and-distribute”: It seeks to cut labour costs to increase the profits that it can distribute to shareholders as buybacks and dividends. With dividends, the company provides income streams to all shareholders.

Buybacks, in contrast, reward sharesellers who are in the business of timing the buying and selling of the company’s shares. That includes not only stock traders at Wall Street banks and hedge funds but also senior corporate executives, who get most of their remuneration from stock-based pay.

These “predatory value extractors” use buybacks to channel corporate cash into their bank accounts at the expense of everyone else.

Companies whose executives are in downsize-and-distribute mode tend to engage in other types of corporate behavior that is bad for our wealth and health. For decades, the US pharmaceutical lobby has fought price regulation by arguing that the far higher prices that Americans pay for medicines compared with other nations provide more drug company profits that can be reinvested in drug innovation.

But from 2009 through 2018, the 18 pharmaceutical companies in the S&P 500 Index distributed 106% of their combined profits to shareholders, including $335 billion in buybacks.

The $622 billion distributed as buybacks plus dividends was 14% more than these companies spent on research and development. These pharma companies charge high drug prices to increase their profits to boost their stock prices.

If the purpose of a pharma company should be the development of safe, effective, and affordable medicines, the purpose of an aircraft manufacturer should be to produce planes which have a miniscule probability of technical failure that could cause a fatal crash.

Sadly, Boeing, a 104-year-old US company that competes with Europe’s Airbus in the large-aircraft market, had two crashes of its brand-new 737 MAX plane within five months of each other in 2019, leaving 346 people dead.

Boeing executives should have focused on developing and delivering to airlines the safest possible replacement for its narrowbody midrange 737NG. Instead they lavished tens of billions of corporate dollars on buybacks so that the company’s stock price would soar.

From January 2013, with the 737 MAX still in development, to the first week of March 2019, just prior to the Ethiopian Airlines crash that prompted the worldwide grounding of the aircraft, Boeing did over $43 billion in buybacks.

Why are buybacks permitted? The Securities and Exchange Commission (SEC), the US government agency charged with protecting the integrity of financial markets, once viewed buybacks as market manipulation. But when Ronald Reagan became President in 1980 he appointed Wall Street banker John Shad as SEC chair, and the agency quickly transformed from a regulator to a promoter of US stock markets.

In November 1982 the SEC adopted Rule 10b-18, which, by permitting massive buybacks, is a license to loot the business corporation.

Our research on buybacks has gained the attention of some US legislators. In March 2019, Senator Tammy Baldwin (D-WI) introduced the Reward Work Act, which would rescind SEC Rule 10b-18 - in effect banning buybacks. This Act would also require that all publicly listed companies in the United States have employee representatives as one-third of their board.

To reverse extreme income inequality, these new participants in US corporate governance would face the formidable challenge of ending financialized business as usual. For that, they would need a deep understanding of the critical importance of retain-and-reinvest to achieving stable and equitable economic growth.  

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